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Call Money Dips

Call money rates have been under 6 per cent for some time. Does this news mean anything to you?

Dip. dip. dip

First, the definition. The ‘call money rate’ is the interest rate in the call money market, where money is lent (by one bank to another, typically) for short durations, ranging from ‘overnight’ to 14 days.

This rate typically indicates the liquidity situation in the market. Marketmen remember when the rate was in double-digits. This was when liquidity conditions were tight, and cash wasn’t so easy to lay a finger on. These days, the rate is under 6 per cent – which indicates a great degree of liquidity comfort. There’s a lot of money around (and yet, inflation shows no sign of raising its head).

So, what explains the dramatic difference?

The call rate is no longer quite as ‘market driven’, in a pure demand-and-supply sense, as it once was. It is now determined to a very large extent by the RBI’s ‘repo rate’, which is the rate at which it buys Treasury Bills from the Indian Government. This acts as a benchmark, or a signalling device to indicate the central bank’s preferred interest rate. The repo rate has been low since April this year, and is likely to remain so – in consistency with the lower interest rate regime.

Earlier, the story was quite different.The link between the call rate and the repo-rate was rather weak, with the former shooting into double digits whenever therw was a spike in demand for funds. However, last year, the RBI imposed a limit on borrowings by scheduled commercial banks from the call money market. In a day, a bank cannot borrow more than 2 per cent of aggregate deposits (as recorded at the end of March of the previous financial year). “The cap on call is a move by the central bank towards restricting the extent of borrowing in the call money market,” says an investment banker with ABN Amro, adding that the idea was to stop treasury operations (speculative investments) being conducted with money-market funds. If banks do need extra funds, they must borrow from the RBI.

That is what has ended the call market volatility. Another consequence of RBI’s action has been to curtail the ‘animal spirits’ driving the G-Sec boom.

The call market continues, otherwise, as before. The size of the market for such funds in India is between estimated at around Rs 65,000 million, of which public sector banks account for 80 per cent of borrowings and foreign banks/private sector banks account for the rest. Non-bank financial institutions like IDBI, LIC, GIC and so on participate only as lenders in this market.

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